Russians Rue Economy as Most Expensive Olympics Begin at Sochi

On its way to center stage in Sochi today, the Olympic flame passed through outer space and the bottom of Baikal, the world’s deepest lake, heralding the spirit of the games and Russia’s greatness.

The torch’s odyssey meant something else for Daniil Galkin. For the 88-year-old retired architect, it was a reminder of President Vladimir Putin’s priorities even as the country’s economy sputters.

“Our leaders want to bask in the limelight and immortalize themselves by means of funds that would have helped people,” Galkin said strolling through a snowy Moscow park. “That leaves a horrible impression when you see the miserable hospitals, when you see that Russia still has almost no roads.”

Putin marshalled more than $45 billion to host the most expensive Winter Olympics, rather than spending on schools, hospitals and infrastructure investors say is needed to revive growth. Government forecasts show that the economy, which expanded at an average rate of 7 percent in the first eight years of Putin’s rule, will grow at a third of that pace between now and 2030.

“If all that astronomical amount of money, astronomical even for Russia, had been invested in the improvement of utilities and services, it would have given a strong push to economic development,” said Vadim Bit-Avragim, who helps manage about 148 billion rubles ($4.3 billion) at Kapital Asset Management LLC in Moscow.

‘Not Growth’

The economy expanded 1.3 percent last year, which “can’t even be regarded as growth,” First Deputy Prime Minister Igor Shuvalov said Jan. 15. The Olympics will mainly boost the economy near Sochi, according to a study released Feb. 5 by the London-based European Bank for Reconstruction and Development.

In 2007, Putin campaigned at the International Olympic Committee meeting in Guatemala as the leader of a country boasting the fastest growth of the past 18 years, boosted by the surging price of oil and gas, which account for half of budget income.

In those boom years, Russia failed to diversify its economy like other oil-reliant countries including the United Arab Emirates.

“Higher sustainable growth is clearly possible, but that would require a new growth model, relying on a more diversified economic structure,” Antonio Spilimbergo, the International Monetary Fund’s mission chief in Moscow, said in a report.

‘Strange’ Expectation

While Sochi has the palm-lined seaside promenades of tourist destinations like Dubai, the parallels are limited. Tourism accounts for about 1.5 percent of Russia’s $2 trillion economy, according to Natalia Orlova, chief economist at Alfa Bank in Moscow. Russians prefer to vacation abroad at destinations like Egypt or Turkey.

“It’s strange to expect foreign tourists to come before Russians will be ready to go there,” said Vladimir Tikhomirov, chief economist at Otkritie Financial Corp. in Moscow.

For the Sochi games, Russia had to build the sports-specific infrastructure almost from scratch. Unlike previous hosts such as Turin or Salt Lake City, Sochi hadn’t been developed as a ski resort. It had no more than 15 percent of the infrastructure ready when Russia won the rights to the Olympics, according to Putin.

He mobilized resources, amending budget spending with investment by companies including OAO Gazprom (OGZD), the largest gas producer, United Co. Rusal, the biggest aluminum maker and OAO Sberbank, Russia’s top lender.

Huge Gains

The government spent about 530 billion rubles and private investors stumped up about 1 trillion, Finance Minister Anton Siluanov told Ekho Moskvy radio in January.

The government is confident on the benefits. The gain “is huge,” Deputy Prime Minister Arkady Dvorkovich said Jan. 22 on Bloomberg Television. Economy Minister Alexei Ulyukayev last month touted the inflow of tourists and demand for services.

Russia built 14 venues, including the main stadium and four ski resorts, adding 19,000 hotel rooms, the government said. More than 73,000 workers built 260 kilometers of roads, 200 kilometers of railway, 54 bridges and 22 tunnels.

Regardless of those engineering feats, uncertainty over the project’s long-term legacy overshadows immediate benefits, even in the areas near Sochi, according to Moody’s Investors Service.

“Increases in tax revenue from tourism are unlikely to be sufficient to cover the anticipated growth in budget expenditure,” the credit evaluator said in a report.